What is the relationship between factor intensity reversal and the elasticity of substitution?

What is the relationship between factor intensity reversal and the elasticity of substitution?

The factor-intensity reversal is likely to take place if the difference in the elasticity of substitution of L and K is greater in the production of two commodities, steel and cloth. If country A is labour- abundant and its wage rate is low, it will produce cloth through labour-intensive techniques.

What is factor intensity reversal?

Factor intensity reversal means that a good/industry is relatively capital intensive compared with other goods/industries within a country/region but relatively labor intensive com- pared with other goods/industries within another country/region.

What is factor intensity?

Factor intensity refers to the relative amounts of capital and labor used in producing a good. Fig. 5.1 shows the use of capital and labor in the production of two commodities. The amount of capital per laborer in the production of a good is called the capital-labor ratio.

What is factor intensity in Heckscher Ohlin theory?

The Heckscher-Ohlin theory attributed the comparative differences in costs also to the factor intensities which have been defined by Ellsworth as “relative use made of each one of the two (or more) factors when combined in production.” Alternatively, factor intensity means the relative proportions in which two factors.

What is elasticity of substitution in economics?

Elasticity of substitution measures the ease with which one can switch between factors of production.

What is demand reversal?

Demand Reversal: Occurs when, due to domestic demand for the capital intensive good, a capital abundant country ends up importing the capital intensive good and exporting the labor intensive good.

What is abundant factor?

The idea behind factor abundance is that the ratio of one factor to other factors in a country is greater than the same ratio for all other countries. In the three factor, three country model, country 1 is abundant in factor 1 in.

What does the Rybczynski theorem postulate?

It states that at constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute decline of the output of the other good.

What is the importance of elasticity of substitution?

To increase economy growth and unemployment, elasticity of substitution plays an important role. The extent of how economy growth could be increased and unemployment could be reduced depends on degree of factor substitution.